George Osborne claims, with justification, that things are moving up rather than down and there is a slow recovery under way. It is certainly broader based than the ‘no more boom and bust’ model driven into the ditch by Labour, which remains confused about what it would actually do to make things better rather than worse.
Nevertheless this recovery is still too reliant on consumption rather than manufacturing and production; it is about spending existing wealth rather than creating new. It is also fuelled by quantitative easing into the financial sector which has raised share prices and is now feeding through into increasing house prices, but is not fuelling expansion in production to anything like the same extent. None of this is good news and it means that such a recovery as will develop on this foundation will be subject to severe correction trauma at some point down the line and before it has succeeded in transforming Britain’s chronic economic decline relative to its peers.
Inherent in the current situation is a single explosive anomaly. Assets are rising while living standards are falling. In particular house prices are now rising significantly faster than inflation. If this is not ringing a very loud bell at the Bank of England it should be. In many blog posts and in my book published in 2009, I argued the case for a separate Bank of England controlled Mortgage Rate, operating alongside Bank Rate, to allow a signal for the increase in mortgage costs to curb house price rises, whilst leaving interest rates for business low. It is time to look at this idea.
Failure to curb rising house prices, rising as they are from an excess value anyway, will guarantee one thing for sure. This so called recovery may last until the general election in 2015, then it will blow up. It may be that is Osborne’s plan. It is certainly where Labour should concentrate its economic guns. If it has any.
It is an absolute requirement of the re-balancing of the British economy so that it can sustain a continuous period of economic recovery, rather than a flash in the pan, that housing costs relative to living costs and earnings fall very dramatically. At the moment they are going in the opposite direction. This is not good news for Mr Osborne, or for anybody.